A dovish Powell could provide some relief next week for gold prices stuck at five-month lows
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(Kitco News) - Growing worries that the Federal Reserve, in its bid to fight inflation, will keep interest rates aggressively elevated longer than expected is taking a significant toll on gold as prices end the week near a five-month low.
While there is still a lot of optimism that gold can regain its luster by the end of the year, analysts are warning investors that a lot of near-term technical damage has been done, and the precious metal has room to move lower next week.
Analysts note that although economic uncertainty is fairly elevated as China's economy shows signs of stress, the precious metal is not seeing much investor interest as a safe-haven asset. Rising bond yields, which hit a 15-year high Thursday, have become significant competition for gold.
Some analysts noted that it has become more compelling to hold three-month U.S. Treasury bills with a 5% interest than gold.
"The U.S. economy is not going to collapse overnight, so you would be foolish not to invest in short-duration bonds," said Adrian Day, president of Adrian Day Asset Management. "But short-term Treasuries is just a parking spot. It is not a long-term investment."
Day added that he remains long-term bullish on gold, but it is difficult to ignore the current weakness in the market. December gold futures are closing the week at $1,918.20 an ounce, down 1.4% from last week. This is the fourth consecutive week of lower prices for the precious metal.
Ole Hansen, head of commodity strategy at Saxo Bank, said he also maintains a long-term bullish outlook for gold but sees a risk of lower prices next week.
"While we maintain a bullish outlook for gold, these developments also highlight the risk that gold may continue to struggle, attracting demand from investors until something breaks, either through a credit event, a weaker dollar, or the belief the FOMC has switched its focus towards cutting rates. Technical traders are unlikely to offer much support until the downtrend is broken and, until then, gold may be at risk of an extension towards [spot gold] $1865," he said in a weekly report.
The Federal Reserve continues to dominate the gold market
Although economic data could create short-term volatility in the precious metals market next week, analysts expect to see muted market action as investors wait for Friday as Federal Reserve Chair Jerome Powell speaks at the central bank's annual retreat at Jackson Hole, Wyoming.
Recent economic data has provided little guidance on the health of the economy, but a growing choir of economists expects that Powel will strike a more dovish tone even as he says the central bank will keep its options open and remain data dependent.
"We view next week's Jackson Hole symposium as a good opportunity for Chair Powell to start laying the ground for the next evolution of the Fed's post-Covid policy guidance," said rate analysts at TD Securities. "Given recent favorable inflation and labor market data, we expect the end-of-the-tightening-cycle message to dominate Fedspeak in coming weeks as we approach the September FOMC meeting."
Michele Schneider, director of trading education and research at MarketGauge, said that even neutral comments from Powell would be enough to support gold prices as it would indicate that bond yields have peaked.
Schneider added that Powell is in a difficult place as he has tried to maintain an aggressive stance in the face of a slowing economy.
"There is still a lot of debate and uncertainty on the direction of the economy: are we going to see a recession, a soft landing, deflation, stagflation? Regardless, we know that we will see some negative effects from higher interest rates at some point," she said. "The Federal Reserve will be unable to maintain these aggressive rates when the economy starts to slow. They will have to cut interest rates even as inflation remains high and those expectations are supporting gold prices."
Although gold has seen solid selling pressure in the last four weeks, Schneider said that the market continues to show resilient strength. She pointed out that despite the selling pressure, gold remains above its March lows.
"I'm not worried about gold," she said. "I would be looking to buy at lower levels."
Technical damage has been done
While there might be a silver lining for gold next week, there are still some dark clouds hovering over the marketplace. Analysts noted that it has suffered significant technical damage, dropping below its 200-day moving average.
Alex Kuptsikevich, the FxPro senior market analyst, said in a note that spot gold prices could be on their way to $1,800 an ounce as the precious metal has seen only three positive sessions through August.
Gold's sharp decline began a month ago when the bears once again prevented the metal from consolidating above $1980, a critical resistance level since May," Kuptsikevich said. "On the way down in August, gold first broke below the 50-day moving average and then two days ago below the 200-day moving average. Both curves act as medium and long-term trend indicators. If there is no strong rally above $1905 today or Monday, confidence will grow that gold's downtrend is already established. The $1800-1810 area is a potential technical target in this case. This is where gold has been supported or surrendered many times over the past three years."
Marc Chandler, managing director at Bannockburn Global Forex, said that gold appears to be looking for a bottom, and next week's price action could be crucial.
"A Close above the 5-day moving average ~$1897, which it has not done this month, maybe the first sign that the downside momentum is easing," he said. "A move above the 200-day moving average (~$1906) would help stabilize the technical tone."
Next week's data:
Tuesday: Existing Home Sales
Wednesday: Flash Manufacturing PMI, New Home Sales
Thursday: Weekly Unemployment Claims, Durable Goods Orders, Jackson Hole Symposium
Friday: Fed Chair Powell Speaks at Jackson Hole